Delaware’s Implied Contractual Covenant of Good Faith and “Sibling Rivalry” Among Equity Holders
Proceedings of the 21st Century Commercial Law Forum: 15th International Symposium 2015 Tsinghua University School of Law, (Beijing, China)
An obligation of good faith and fair dealing is implied in every common law contract and is codified in the Uniform Commercial Code (“U.C.C”). The terminology differs: Some jurisdictions refer to an “implied covenant;” others to an “implied contractual obligation;” still others to an “implied duty.” But whatever the label, the concept is understood by the vast majority of U.S. lawyers as a matter of commercial rather than entity law. And, to the vast majority of corporate lawyers, “good faith” does not mean contract law but rather conjures up an important aspect of a corporate director’s duty of loyalty.
Nonetheless, Delaware’s “implied contractual covenant of good faith and fair dealing” has an increasingly clear and important role in Delaware “entity law” – i.e., the law of unincorporated business organizations (primarily limited liability companies and limited partnerships) as well as the law of corporations. This essay addresses the effect of Delaware’s implied covenant on what might be termed “sibling rivalry” – i.e., entity restructurings that benefit one set of equity holders to the detriment of another set. Such restructurings are typically “zero sum games” – one sibling will win; the other will necessarily lose.
Delaware’s implied covenant is a powerful but narrow concept, and the meaning of “good faith” varies with the context. Accordingly, much of this essay is in the nature of a lemma – i.e., “an auxiliary proposition used in the demonstration of another proposition.” Put another way: building blocks.
Kleinberger, Daniel S., "Delaware’s Implied Contractual Covenant of Good Faith and “Sibling Rivalry” Among Equity Holders" (2015). Faculty Scholarship. 548.